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Re: US, Russia exchange threats at tense UN meeting

Originally Posted by Fearandloathing

I doubt Russia is worried about borrowing from US banks as China is a creditor, and the second part of your post shows exactly how so called sanctions will not work. Clearly if the best option isn't an option.

It's not an insurmountable problem, but it's a problem. Not only that but Russia was threatened with having their credit rating degraded. My point is that the sanctions did have an effect. Not bone crushing by any stretch, but an effect nonetheless. Finance is based on value, Value is a function of perception. Negative perception is not good for value. Even the Russian finance minister admits this.

Having said that, I agree, bone crushing sanctions are not a good idea at this point.

Re: US, Russia exchange threats at tense UN meeting

Originally Posted by MildSteel

It's not an insurmountable problem, but it's a problem. Not only that but Russia was threatened with having their credit rating degraded. My point is that the sanctions did have an effect. Not bone crushing by any stretch, but an effect nonetheless. Finance is based on value, Value is a function of perception. Negative perception is not good for value. Even the Russian finance minister admits this.

Having said that, I agree, bone crushing sanctions are not a good idea at this point.

Sanctions would negatively impact citizens of both nations in the long run.

Re: US, Russia exchange threats at tense UN meeting

Originally Posted by MildSteel

If shipments of Russian energy are stopped for Europe, it will definitely hurt Russia, no doubt. But it will also hurt not only Europe, but the global economy as well. Recall that Europe is in bad shape economically now. Germany is basically keeping Europe afloat. However, Germany depends on Russia for 36 percent of their natural gas. If that stops, German exports will become too expensive and the German economy will come down bringing Europe and the rest of the world with it.

It is more than that. Germany depends on Russia for a large amount of its coal and oil as well and their economy is driven by trade with exports and imports each amounting to roughly half the country's GDP. A loss of Russian resources would eventually cripple their industry and deprive them of a major source of economic strength. At the same time their businesses are the ones most exposed to Russia.

One really has to consider how interconnected the various European economies are in order to understand exactly how destructive this situation would be for the EU. I don't think analysts talking about the problems from a cut-off are really putting much thought into their rose-colored views. As I have noted elsewhere, the Baltic states and Finland get a large portion of their electricity directly from Russia, in addition to their various hydrocarbon fuels. On top of that, the Baltic states depend heavily on trade with Russia, trade amongst each other, and trade with Finland.

The immediate loss of electricity, natural resources, and trade from Russia would be devastating beyond anything that would affect Russia in the short-term. What makes this a disaster in the making is the exposure of the Scandinavian banking system to such a collapse of those economies. According to the IMF, a major loss on banking assets in Finland and the Baltic states would cause Swedish banks to incur significant losses, forcing deleveraging equivalent to several points of Sweden's GDP. Denmark's banking system also has hugeexposure to Finland and the Baltics. Norway has exposure to those states as well, but their exposure to the Swedish banking system is the real risk at that point. Its largest bank has some exposure to the Baltic states and the other Nordic countries, but the Norwegian banking system also includes a number of Swedish banks. One bank with nearly half of Finland's banking market is considered "too big to fail" in Norway due to the size of local subsidiary.

Basically, a collapse of the Finnish and Baltic economies is liable to cause a severe financial crisis all over the Nordic region, which would cause serious systemic risks all over Europe. At the same time Southeastern Europe would be experiencing price hikes and Bulgaria would be facing severe pressure due to the near total dependency on Russian oil and gas, not to mention refined petroleum products, together with their lack of sufficient storage to meet the loss. Austria would be undergoing serious pressure from the outset due to Raiffeisen bank having an eighth of its assets in Russia, in addition to exposure in Ukraine and Bulgaria.

For Europe, their only hope would be that Russia capitulates within the first three months. That would be their only saving grace. If Russia holds out that long they gain the upper hand as that is when the strategic natural gas and oil reserves of many countries would be set to run dry. It may not even take that long as the longer things go and the lower the reserves get, the more likely these countries are to start cutting output to preserve supply as long as possible, thus causing a shortage even with some spare supply. Either way, once the oil and gas starts getting real sparse for those countries heavily dependent on Russia, the jig is going to be up. Austria happens to be one of those countries, as is Italy (depending on natural gas imports from Russia for a significant portion of its electricity), and both of those countries hold large stakes in the very parts of Eastern Europe that are nearly entirely dependent on Russia for their energy needs.

After three months, Brussels will have little choice but to cave. Otherwise Eastern Europe will see its entire economy shutdown in the face of fuel droughts and blackouts, which will quickly bring down Austria and Italy as well due to their own dependency and their outsized banking exposure to Eastern Europe. By then, the system will be too far gone for anyone to save. In Europe's current economic and political state, not getting Russia to concede within the first few months means facing total disintegration. The problem is that, as I noted, Russia has the financial resources and political wherewithal to plug the gap enough to avoid any massive downturn for months. However, no amount of money can plug an energy gap.

I presume this is why you don't see any articles at present talking about what to do if Russia does cut off the energy and doesn't change its mind in the first few months. They all know what it would mean and just want to shut the thought out of their minds, preferring to think it would destroy Russia before it would get that far. Of course, the Arab monarchies pulled off a significant drop in output only to come out richer and with more political clout, so history is not in favor of the optimists.

Originally Posted by MildSteel

Not only that but Russia was threatened with having their credit rating degraded.

After a certain point being downgraded does not mean nearly as much to a country. So long as they aren't junked the impact will be less serious. Europe has much more to lose on that front. If the euros are fool enough to start a trade war with Russia and Moscow shuts off their energy then I expect there will not be any AAA-rated countries in the EU anymore.

"For what is Evil but Good-tortured by its own hunger and thirst?"- Khalil Gibran

Re: US, Russia exchange threats at tense UN meeting

Originally Posted by NIMBY

Bone-crushing sanctions are all that soviets understand .

A man can get angry at the door because he hurts his fingers when he shuts the door and his fingers get caught. Not understanding physics, he can hit the door with all his might with his fist. However, the door will hit back just as hard, and he can break his knuckles.

Re: US, Russia exchange threats at tense UN meeting

Originally Posted by Demon of Light

It is more than that. Germany depends on Russia for a large amount of its coal and oil as well and their economy is driven by trade with exports and imports each amounting to roughly half the country's GDP. A loss of Russian resources would eventually cripple their industry and deprive them of a major source of economic strength. At the same time their businesses are the ones most exposed to Russia.

One really has to consider how interconnected the various European economies are in order to understand exactly how destructive this situation would be for the EU. I don't think analysts talking about the problems from a cut-off are really putting much thought into their rose-colored views. As I have noted elsewhere, the Baltic states and Finland get a large portion of their electricity directly from Russia, in addition to their various hydrocarbon fuels. On top of that, the Baltic states depend heavily on trade with Russia, trade amongst each other, and trade with Finland.

The immediate loss of electricity, natural resources, and trade from Russia would be devastating beyond anything that would affect Russia in the short-term. What makes this a disaster in the making is the exposure of the Scandinavian banking system to such a collapse of those economies. According to the IMF, a major loss on banking assets in Finland and the Baltic states would cause Swedish banks to incur significant losses, forcing deleveraging equivalent to several points of Sweden's GDP. Denmark's banking system also has hugeexposure to Finland and the Baltics. Norway has exposure to those states as well, but their exposure to the Swedish banking system is the real risk at that point. Its largest bank has some exposure to the Baltic states and the other Nordic countries, but the Norwegian banking system also includes a number of Swedish banks. One bank with nearly half of Finland's banking market is considered "too big to fail" in Norway due to the size of local subsidiary.

Basically, a collapse of the Finnish and Baltic economies is liable to cause a severe financial crisis all over the Nordic region, which would cause serious systemic risks all over Europe. At the same time Southeastern Europe would be experiencing price hikes and Bulgaria would be facing severe pressure due to the near total dependency on Russian oil and gas, not to mention refined petroleum products, together with their lack of sufficient storage to meet the loss. Austria would be undergoing serious pressure from the outset due to Raiffeisen bank having an eighth of its assets in Russia, in addition to exposure in Ukraine and Bulgaria.

For Europe, their only hope would be that Russia capitulates within the first three months. That would be their only saving grace. If Russia holds out that long they gain the upper hand
.......
After three months, Brussels will have little choice but to cave. Otherwise Eastern Europe will see its entire economy shutdown in the face of fuel droughts and blackouts, which will quickly bring down Austria and Italy as well due to their own dependency and their outsized banking exposure to Eastern Europe. By then, the system will be too far gone for anyone to save. In Europe's current economic and political state, not getting Russia to concede within the first few months means facing total disintegration. The problem is that, as I noted, Russia has the financial resources and political wherewithal to plug the gap enough to avoid any massive downturn for months. However, no amount of money can plug an energy gap.

While what you have put forward certainly has merit, I think your analysis leaves out one crucial factor. I made a similar, though not the same error back in 2008 when I thought the world financial system was surely going to collapse. But learned something then. I didn't realize the types of things the Federal Reserve could do as a result of the dollars reserve currency status. Essentially the Federal Reserve can print as much money as needed to keep the financial system of not only the US, but Europe as well from collapsing. Now you may ask how can they possibly prop up the banking system of Europe. Well they did it, and here's how. Back when Russia took over South Ossetia, the banking system of Europe was about to collapse. However, what the Federal Reserve did was to take the currency of various European nations, in exchange for US dollars. And because everyone, including Russia gladly accepts US dollars, the Fed was able to keep the European banking system from collapsing.

That's the kind of power Putin is up against. I mean yeah, Russia would survive, but they would soon exhaust their foreign reserves. And the Fed will not swap dollars for rubles. At that time, Russia will have a very difficult time importing the things it needs. Russia imports quite of bit of it's food. It would get rough. Yeah they will find other customers for their energy, but they will lose a huge part of their customer base, so they would hurt tremendously. As such Russia will get the worse of that struggle.

It's a nasty scenario and is something both sides will seek to avoid, if possible.

Originally Posted by Demon of Light

After a certain point being downgraded does not mean nearly as much to a country. So long as they aren't junked the impact will be less serious. Europe has much more to lose on that front. If the euros are fool enough to start a trade war with Russia and Moscow shuts off their energy then I expect there will not be any AAA-rated countries in the EU anymore.

My understanding is that they are at BBB, which is not to far from junk.

Re: US, Russia exchange threats at tense UN meeting

Originally Posted by MildSteel

While what you have put forward certainly has merit, I think your analysis leaves out one crucial factor. I made a similar, though not the same error back in 2008 when I thought the world financial system was surely going to collapse. But learned something then. I didn't realize the types of things the Federal Reserve could do as a result of the dollars reserve currency status. Essentially the Federal Reserve can print as much money as needed to keep the financial system of not only the US, but Europe as well from collapsing. Now you may ask how can they possibly prop up the banking system of Europe. Well they did it, and here's how. Back when Russia took over South Ossetia, the banking system of Europe was about to collapse. However, what the Federal Reserve did was to take the currency of various European nations, in exchange for US dollars. And because everyone, including Russia gladly accepts US dollars, the Fed was able to keep the European banking system from collapsing.

There are significant differences. Back in 2008 most governments were experiencing continued growth right up to the collapse. More importantly, the collapse was a result of fear and valuation losses rather than any material losses. Some material losses existed, but they were not of the extreme nature we are talking about here. You would have the fear and valuation losses set in rather quickly as well, but the material losses would be severe. Pumping money into the system "saved" the economy, but even that has had serious negative side effects that can only be tamped down by continuing to pump money into the system. Such an approach is unsustainable. In the case of an energy crisis, you are talking about a fundamental and severe material loss. People would not be able to pay off loans due to high energy prices and businesses that are unable to operate due to energy disruptions would not be able to sustain their cash flow. Material losses would be immediate and severe as banks would see large deposit outflows as citizen try to fill in finance gaps and any borrowers who were on the verge of default already will default in rapid succession. Banks would see cash inflows plummeting at the same time as deposit outflows are accelerating.

Of course, state intervention is an option, but the effect would be less decisive. This wouldn't be like a normal bank run where people are pulling cash because they fear the money will no longer be there the next day. People would be pulling cash because they would be increasingly cash-starved. Recapitalization of the banks by governments will not give people the energy they need. It would basically be like trying to bail out a sinking boat without plugging the leak. What you have to keep in mind is exactly how much we use energy every day and how vital it is to the economy. Currency can be replaced and printed, but it is not that simple with energy. No amount of money being injected into the system would change the fundamental picture in an energy crisis.

That's the kind of power Putin is up against. I mean yeah, Russia would survive, but they would soon exhaust their foreign reserves. And the Fed will not swap dollars for rubles. At that time, Russia will have a very difficult time importing the things it needs. Russia imports quite of bit of it's food. It would get rough. Yeah they will find other customers for their energy, but they will lose a huge part of their customer base, so they would hurt tremendously. As such Russia will get the worse of that struggle.

It's a nasty scenario and is something both sides will seek to avoid, if possible.

Russia's foreign reserves are worth over half a trillion dollars. It would take them a while to exhaust that. The thing about the EU cutting off imports is that it would lessen Russia's need for foreign currency at the same time, as well as diminishing the import risks from a devalued ruble. On the flip-side, a devalued ruble makes their exports that much more lucrative. Remember when American politicians were repeatedly crying foul over China devaluing its currency? That was because it made imports from China more attractive to businesses due to the exchange rate. It would actually give Russia another potential means of windfall. On the one hand, the denominated value of their chief exports will be much higher on the international market and on the other hand a devalued ruble means the foreign currency payments for it are higher in value domestically. Simultaneously, they can keep energy prices low domestically because more supply will be consumed in their home market.

My understanding is that they are at BBB, which is not to far from junk.

Only Fitch rates them at BBB, two notches above junk, while the other two major ratings firm put them three notches above junk. Unless the U.S. decides to exert political pressure on them, I do not see such a rapid downgrade. Reality is that Russia is under no serious threat of struggling to repay its rather small foreign debts. This rating is mostly due to Russia having defaulted back in 1998. Just like a regular creditor, a previous default trashes your score for a long time.

"For what is Evil but Good-tortured by its own hunger and thirst?"- Khalil Gibran